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The MSA is a 1998 agreement among 46 states, the District of Columbia and four U.S. territories (the settling states) and four major tobacco manufacturers - Phillip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Co. and Lorillard Tobacco Co. - resolving lawsuits that alleged that the tobacco companies targeted youth in their marketing and knew of the addictive and adverse health consequences of smoking but failed to disclose that information to consumers.

The MSA provides that the four manufacturers - the original participating manufacturers (OPMs) - would make payments to the states and refrain from certain forms of advertising of their products. The settling states agreed to enact model legislation, known as an escrow statute, that required any tobacco manufacturer whose cigarettes are sold in a settling state to join the MSA within 90 days of its execution as a subsequent participating manufacturer (SPM) or remain a nonparticipating manufacturer (NPM) and make payments into an escrow account that was to be held for 25 years for the benefit of the settling state. The MSA contained a "limited most favored nations" (LMFN) clause that granted the OPMs the right to receive any more favorable terms granted to other participating manufacturers.

VIBO Corp. Inc., d/b/a General Tobacco, did not exist when the MSA was executed but joined in 2004. When it became unable to meet its back payment obligations and its payments going forward, it sought to execute an amended adherence agreement (AAA) that would lessen its payment obligations with the attorneys general of the settling states. The attorneys general asked the participating manufacturers to waive any LMFN rights that they might have if the AAA was executed, but the participating manufacturers refused, and the attorneys general declined to execute the AAA with General Tobacco.

General Tobacco filed a complaint in the U.S. District Court for the Western District of Kentucky against the attorneys general of the settling states, the OPMs and the SPMs. The company stated claims for violations of the Sherman Act; violations of the U.S. Constitution, including the commerce clause, the compact clause, the equal protection clause of the 14th Amendment and the due process clauses of the Fifth and 14th Amendments; violation of the Civil Rights Act; and fraud in the inducement.

General Tobacco argued that it was forced to participate in an unconstitutional agreement by the settling states' "draconian actions" and that the payment structure of the MSA illegally favors the grandfathered SPMs. Moreover, it said, the settling states have not adequately enforced their own implementing statutes against NPMs. According to General Tobacco, the grandfathered SPMs and the NPMs enjoy a significant and unfair pricing advantage over General Tobacco and similarly situated SPMs.

Judge Jennifer B. Coffman granted dismissals to all the attorneys general on the ground that she lacked subject matter jurisdiction to hear the claims and that General Tobacco failed to state a claim upon which relief can be granted. She also granted dismissals as to the manufacturer defendants, concluding that the Noerr-Pennington doctrine shielded them from liability under the Sherman Act for petitioning the government for action that would violate antitrust laws.

In affirming, the Sixth Circuit rejected General Tobacco's argument that Noerr-Pennington immunity did not apply because rather than petition the attorney general defendants for antitrust action, the manufacturer defendants directly violated antitrust law.

"[I]t is clear that the state governments' actions were the actual cause of the alleged antitrust violations. Although Manufacturer Defendants sent notice to Attorneys General Defendants that they would not waive their LMFN rights - to the extent that the AAA would trigger the LMFN clause at all - the LMFN clause itself creates no vote or veto power for the PMs; all decision-making authority rests with Attorneys General Defendants. Moreover, Manufacturer Defendants' allegedly selfish motivation in refusing to waive their LMFN rights is immaterial," the court said.

The appeals panel also rejected General Tobacco's argument that the manufacturer defendants lost their immunity under the sham exception to the Noerr-Pennington doctrine because the manufacturer defendants knew that the AAA did not contain more favorable terms than the participating manufacturers had under the MSA and, therefore, did not trigger the LMFN clause, but the participating manufacturers nonetheless "invoked" their LMFN rights.

"Plaintiff undermines its argument that Manufacturer Defendants' petitioning was a sham by admitting that Manufacturer Defendants actually wanted to prevent the execution of the AAA. Thus, by Plaintiff's own admission, Manufacturer Defendants petitioned for a specific outcome from the government and succeeded; this is the precise situation that falls outside of the sham exception," the court said.

The Sixth Circuit also ruled that the attorneys general defendants were immune from liability under the Sherman Act pursuant to the state-action doctrine, concluding that the states were acting in their sovereign capacities, not in their capacities as market participants, when they executed and enforced the MSA and refused to execute the AAA.

"In joining the Multistate Settlement Agreement, the States did not enter the tobacco market as a buyer or seller, nor did they assume control or ownership of any entity within the market. . . . [T]he States' actions would not fall under the market participant exception to [state-action] immunity," the panel said, quoting the Third Circuit U.S. Court of Appeals' dicta in A.D. Bedell Wholesale Co., Inc. v. Philip Morris Inc. (263 F.3d 239 [3rd Cir. 2001]).

Because the attorneys general defendants were protected by state-action immunity with regard to the MSA, that immunity extended to the manufacturer defendants.

The panel noted that General Tobacco did not argue that the MSA was a regulatory scheme that permitted the manufacturer defendants to violate antitrust law.

"It instead argues that Manufacturer Defendants violated antitrust law when they misinterpreted the MSA and their rights under the LMFN clause and acted contrary to or in conflict with state supervision. Regardless of whether that assertion has merit, Plaintiff has confused the threshold inquiry of whether the state took action - such as passing a law, regulation, program, or other form of authorization - permitting the private actors to violate antitrust law, with the subsequent inquiry as to whether Defendants were acting within the proper scope of state supervision. Furthermore, we have already found that Attorneys General Defendants, and not Manufacturer Defendants, were the direct cause of the failed execution of the AAA," the court said.

The Sixth Circuit went on to hold that the MSA waived General Tobacco's claims against the attorneys general for violations of the equal protection clause, the due process clause and the commerce clause.

The MSA provided that "Each Participating Manufacturer further acknowledges that it understands that certain provisions of this Agreement may require it to act or refrain from acting in a manner that could otherwise give rise to state or federal constitutional challenges and that, by voluntarily consenting to this Agreement it . . . waives for the purposes of performance of this Agreement any and all claims that the provisions of this Agreement violate the state or federal constitutions."

The appeals panel read the MSA waiver clause to waive "all constitutional claims related to the

MSA . . . even those not grounded on restrictions to Plaintiff's own actions." In addition, the court found that General Tobacco did not allege "that it did not understand that it was waiving its constitutional claims."

Finally, the Sixth Circuit ruled that the District Court properly dismissed the fraudulent inducement claim because General Tobacco did not plausibly state that the attorney general defendants gave clear and explicit consent to be sued on state law claims in federal court.

General Tobacco is represented by John K. Bush and Daniel W. Redding of Greenebaum, Doll & McDonald in Louisville, Ky.

The attorneys general are represented by Gary D. Wilson of Washington, D.C.; Douglas L. Wald and Michael B. Bernstein of Arnold & Porter in Washington; Eric Shapland of Arnold & Porter in Los Angeles; Michael Plumley of Office of the Kentucky Attorney General in Frankfort, Ky.; Irving Scher and Scott Martin of Greenberg Traurig in New York; Charles S. Cassis and Theresa A. Canaday of Frost Brown Todd in Louisville; Stephen R. Patton and Douglas G. Smith of Kirkland & Ellis in Chicago; Robert J. Brookhiser and Elizabeth B. McCallum of Baker & Hostetler in Washington; Merrill S. Schell and M. Stephen Pitt of Wyatt, Tarrant & Combs in Louisville; Eric Estes of Office of the Arkansas Attorney General in Little Rock, Ark.; David Lapp of Office of the Maryland Attorney General in Baltimore; Brett DeLange of Office of the Idaho Attorney General in Boise, Idaho; Paul Berks of Office of the Illinois Attorney General in Chicago; Brian D. Devlin of Office of the Michigan Attorney General in Lansing, Mich.; Douglas A. Bahr of Office of the North Dakota Attorney General in Bismarck, N.D.; Susan C. Walker of Office of the Ohio Attorney General in Columbus, Ohio; Rebekah A. Baker of Office of the Tennessee Attorney General in Nashville, Tenn.; and Michael T. Weirich of Oregon Department of Justice in Salem, Ore.

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